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The Federal Reserve’s industrial production index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. Figures from the latest report suggest some chance of an end to a recent run of months in which US production has gone backwards.

According to the latest figures released by the Fed, US industrial production jumped by 0.6% in August, well in excess of the 0.2% increase which had been expected and a turnaround from July’s 0.1% fall after revisions. However, on an annual basis, growth in industrial production sped up to 0.5% from July’s revised rate of -0.1%.

ANZ economist Adelaide Timbrell said the figures would have some effect on Fed decision-making. “This result was considerably better than expected and will provide the Fed with something to mull over as it discusses rate cuts. Fed Chair Powell previously stated ‘a slowdown in manufacturing did not send a clear signal to the Fed’s rate-setting committee’ but this data does provide further evidence that the Fed doesn’t need to aggressively cut.”

NAB economist Tapas Strickland noted the presence of “one-off factors” which may have bolstered the final figures, such as the 2.6% increase in oil production which occurred during the month. He also pointed to the ISM’s Manufacturing Survey which “continues to point to dire conditions in the manufacturing sector.”

Treasury bond yields finished the day lower, ignoring the superficially strong figures. By the close of business, 2-year US Treasury yields had dropped by 4bps to 1.72% while 10-year and 30-year yields had each shed 5bps to 1.80% and 2.27% respectively.

The RBA left its official cash rate target unchanged at its September board meeting. The rate at which the RBA wishes banks to lend to each in the market for unsecured overnight loans remained at 1.00%.

 Around February of this year, the RBA began to publicly move away from a tightening bias. By April, “there was not a strong case for a near-term adjustment in monetary policy” and, by May, the transformation to an easing bias had taken place. If “there was no further improvement in the labour market in the period ahead….a decrease in the cash rate would likely be appropriate.” A 25bps rate cut was announced in June and another one followed in July.

Since then, the RBA appears to have decided to take a cautious approach. No change was made at the RBA’s August board meeting, nor the meeting in September.The minutes of the September meeting has now been released and the board’s deliberations focussed on the local labour market, the housing market and GDP growth.

“First, employment had continued to grow strongly and the participation rate was at a record high. However, the unemployment rate had remained steady at around 5.2% over recent months.”

“Second, there had been further signs of a turnaround in established housing markets, especially in Sydney and Melbourne, although housing turnover had remained low.”

US retail sales had been trending up since late 2015 but, beginning in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate which brought the annual rate below 2.0% by the end of the year. After an unsteady start to 2019, subsequent months’ figures have produced a recovery which has prevailed into the third quarter of the year.

 According to the latest “advance” sales numbers released by the US Census Bureau, total retail sales increased by 0.4% in August, double the +0.2% which had been expected but half as much as July’s revised growth rate of +0.8%. On an annual basis, the growth rate increased to 4.1% from July’s revised rate of 3.6%.

US Treasury yields finished a lot higher on the day, the net result of some conciliatory statements from both sides of the US-China trade dispute, slightly more-confident US households and the better-than-expected figures. By the close of business, 2-year Treasury yields had increased by 9bps to 1.80%, the 10-year yield had gained 13bps to 1.90% and 30-year yields had added 12bps to 2.37%.

Expectations of another cut in the federal funds rate at the upcoming September FOMC meeting remained firm, although not quite as firm as at the close of the previous day. According to end-of-day prices of federal funds futures, the implied probability of a 25bps rate cut was 79%, down from the previous day’s 88%. An additional cut at December’s meeting was viewed as less likely to happen and the implied probability of a rate cut fell from 66% to 58%.

The “non-store retailers” segment had the largest influence on the overall result for a fourth consecutive month. Sales in this segment increased by 1.6% over the month and by 16.0% over the previous 12-months. The next largest factor was the “building material” segment which increased by 1.5% over the month.

US consumer confidence had started 2019 at well above average levels in a longer-term context, although it was markedly lower than the more buoyant readings which typified most of 2018. After rebounding from the falls of January and February, US households then maintained a historically high level of confidence until it plummeted in August.

The latest survey conducted by the University of Michigan indicates the average confidence level of US households has increased a little after its August plunge. The University’s preliminary estimate of its Index of Consumer Sentiment rose from August’s figure of 89.8 to 92.0 in September, ahead of the consensus figure of 90.2.

The University’s Surveys of Consumers chief economist, Richard Curtin, said the increase was narrowly driven. “While the uptick was across both current and expected economic conditions, the early September rebound was not widespread across age or income subgroups as it only fell among consumers under age 45 and among households with incomes in the top third; these two groups account for about half of all spending.”

He also noted a general expectation by households of a rate cut from the US Fed, stating “These expectations are likely to diminish the impact on spending from a quarter-point rate cut, but if rates remain unchanged, it may increase negative reactions by consumers.” Tariffs and their impact on the US domestic economy also remained a concern.

The annual rate of US consumer inflation halved from nearly 3% in the period from July 2018 to February 2019 and then subsequently fluctuated in a range from 1.5% to 2.0%. However, “headline” inflation is known to be volatile and so reference is often made to “core” inflation figures. This measure has mostly ranged between 1.7% and 2.3% in recent years and it has not been below 2.0% since early 2018. It has now just hit a new post-GFC high.

The latest consumer price index (CPI) figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased on average by 0.1% in August, in line with the consensus figure but less than July’s 0.3% increase. On a 12-month basis, the inflation rate remained at July’s annual rate of 1.8%.

NAB economist Tapas Strickland described the figures as “further challenging the notion the Fed needs to step up its easing simply because it is missing on its inflation mandate.”
Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, increased on a seasonally-adjusted basis by +0.3% for the month, higher than the 0.2% which had been expected but the same-sized increase as in the previous two months. As a result, the annual rate moved up to 2.4% from July’s comparable figure of 2.2%.

Around the end of 2018, the annual rate of prices received by producers began a downtrend which then continued through 2019. The latest figures may indicate this trend has finished, although more data is required before a firm conclusion can be reached.

 The latest figures from August have been published by the Bureau of Labor Statistics and they indicate producer prices increased by 0.1% after seasonal adjustments. The result was above the expected flat result but it was still less than July’s +0.2%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments increased to 1.8% after recording 1.7% in July and 1.6% in June.

“Core” PPI inflation increased by 0.3%, which is a marked turnaround from July’s comparable figure of -0.1%. Its annual rate bounced back to 2.3% which is where it had been in June before it dropped to 2.1% in July.

ANZ FX strategist John Bromhead said, “Despite this inflation measure coming in stronger than expected, the Fed is still expected to cut interest rates next week, a decision the market has now fully priced in.”

After a lengthy divergence between consumer sentiment and business confidence in Australia which began in 2014, the two sectors converged again around July 2018. Both measures have been around or under neutral levels in recent months but business sentiment has been falling from a higher base, whereas consumer sentiment has been stagnating at or close to neutral levels for some years. This latest consumer sentiment survey indicates households continued to display a certain stoicism in the face of global uncertainties.

 According to the latest Westpac-Melbourne Institute survey conducted over a week in early September, average household optimism has slipped a little to return to just under neutral levels. The Consumer Sentiment Index gave back some of August’s rise as it fell from 100 to 98.2. Any reading above 100 indicates the number of consumers who are optimistic is greater than the number of consumers who are pessimistic. The long-term average reading is just over 101.

Westpac chief economist Bill Evans said, “The consumer mood has lapsed back into slight negative territory again with continued pressure on family finances and concerns about the near-term outlook weighing on sentiment.”

The report did not cause any ripples in local markets. US Treasury yields had increased noticeably overnight and Australian government bond yields largely followed suit. By the end of it, 3-year ACGB yields had gained 4bps to 0.88%, the 10-year yield had increased by 6bps to 1.14% and the 20-year yield finished 7bps higher at 1.55%.

The quit rate as a percentage of total US non-farm employment had been rising slowly but steadily since the end of the GFC. It peaked in August 2018, stabilised and then remained largely unchanged through the remainder of 2018 and into 2019 at a historically high level. Despite international factors and some US surveys casting doubts on future economic conditions, the latest figures have continued in this fashion.

 Figures released as part of the most recent JOLTS report show the quit rate has hit a new series high in July. 2.4% of the non-farm workforce left their jobs voluntarily in July, having registered 2.3% in each of the previous months from June 2018. Quit numbers were highest in the health care/social assistance and professional/business services sectors while the retail trade and durable goods sectors recorded the largest falls. Overall, the total number of quits increased from June’s revised figure of 3.462 million to 3.592 million in July.

ANZ economist Jack Chambers said the high rate illustrated workers’ confidence in their ability to find a new job.

Total job openings fell for a second consecutive month. Total vacancies during July fell by 31,000 from June’s revised figure of 7.284 million to 7.217 million, driven by reduced openings in the wholesale trade, professional/business services and health care/social assistance sectors. Additional openings in the construction and information sectors provided some offset to the fall but, overall, 10 out of 19 sectors experienced fewer job openings than in the previous month.

US Treasury bond yields had been rising significantly in the days prior to the report’s release, apparently as part of a broad movement in yields prior to the ECB’s policy meeting later in the week. This trend continued and Treasury bond yields finished the day noticeably higher. By the close of US trade, 2-year Treasury yields were 7bps higher at 1.67% while 10-year and 30-year yields had each gained 9bps to 1.73% and 2.22% respectively.

Australian business conditions were robust in the first half of 2018 and a cyclical-peak was reached in April of that year. Although they remained well above average for some months, readings began to slip and by the end of 2018, they had dropped to below-average levels. Forecasts of a slowing domestic economy began to emerge in the first half of 2019 and the latest readings from NAB’s survey are consistent with this theme.

 According to NAB’s latest monthly business survey of 400 firms conducted in the latter part of August, business conditions deteriorated for a second consecutive month after a brief spike in June. Since late 2018, NAB’s conditions index had bounced between 3, which is on the low side of normal and 7, which is about average. The index then broke through this lower bound in May 2019. The latest reading registered 1, a modest fall from July’s revised figure of 3.

Largely in line with NAB’s condition index, the latest reading of the confidence index fell from July’s figure of 4 to 1 in August, well below its long-term average reading of 6. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences appear from time to time.

 Westpac senior economist Andrew Hanlan said the survey “reveals that policy stimulus has yet to provide a boost to the economy.  In a surprise result, conditions not only failed to rise but weakened further.” Morgan Stanley Australia strategist Chris Read agreed and said there was “no sign in this release of an improvement in either outlook or current trading as a result of recent tax and rate cuts.” He then went on to say he was “cautious on the extent to which the stimulus to date will pass through to a sustained pickup in spending.”

Since late 2017/early 2018, a very clear downtrend has been evident in the monthly figures of both the number and value of home loan commitments. After the figures from February were released, some economists speculated the worst may have been over. After the Coalition Government retained power in May, economists began to expect a greater demand for mortgages. The RBA then cut official rate in June and July, increasing the attractiveness of property.

July’s housing finance commitment figures have now been released and they were noticeably higher than expected. The total number of loan commitments to owner-occupiers jumped by 5.0%, a marked turnaround from June’s revised figure of -0.8%. On an annual basis, the growth rate recovered from June’s revised figure of -12.0%, recording -8.0%. When “re-financings” are removed, the number of loan commitments increased by 5.3% over the month, well in excess of the expected 1.5% increase but also 8.3% lower than in July 2018.

Westpac senior economist Matthew Hassan said the turnaround came a month earlier than expected.  “While the July data came in above expectations, the surprise relates more to the timing of the lift for the finance data rather than the market upturn itself…” He said other indicators had recently shown an increase in “momentum in August after having stabilised in June-July.”

Despite the surprise, bond yields finished the day lower across the curve, even though the US 2-year Treasury yield had increased a little and its 10-year yield had remained unchanged. By the end of the day, the yield on 3-year ACGBs had lost 2bps to 0.81%, while 10-year and 20-year yields had both shed 6bps to 1.04% and 1.44% respectively.

Reactions in the cash futures market were subdued but expectations of future rate cuts softened. At the close of trade, October contracts implied another 25bps rate cut was a 41% chance, down from the previous day’s 47%. The likelihood of a rate cut at the RBA’s November meeting was essentially the same, having slipped from 94% to 92%. At this level, a third rate cut for the year is still deemed to be highly likely.

 In dollar terms, total loan approvals excluding refinancing increased by 5.1% over the month after having increased by 3.2% in June. However, on a year-on-year basis, total approvals excluding refinancing were still 11.8% lower but it was still an improvement on June’s comparable figure of -17.2% after revisions.